From breakthrough to breakdown Plans for largest Chinese investment in Canadian shale gas dissolve when Encana, PetroChina unable to negotiate operating agreement By Gary Park For Petroleum News
What was hailed as a landmark deal is now in tatters after Encana disclosed that it was unable to put the final touches on a $5.4 billion commitment by PetroChina to accelerate development of the Canadian gas producer’s huge shale gas resources in the Cutbank Ridge area of British Columbia.
Less than five months after the two energy giants, amid much fanfare, rolled out a joint-venture “cooperation agreement” to produce proven gas reserves they have parted ways.
Left behind are questions about the future of investment in Canada’s oil and gas sector by state-owned Chinese companies and Canada’s hopes of making LNG exports to Asian markets.
PetroChina was already seen as a dubious proposition. In 2007 it abandoned an option to take a 49 percent stake in Enbridge’s Northern Gateway oil sands pipeline, accusing the Canadian government and producers of refusing to support its efforts to aggregate 200,000 barrels per day of production for the 525,000 bpd system.
The Encana-PetroChina deal, unveiled after nine months of negotiation, covered 1 trillion cubic feet of proven reserves, 635,000 net acres of undeveloped land, 510 million cubic feet per day of production, 700 million cubic feet per day of processing capacity and 2,000 miles of pipelines and gas storage facilities in Alberta.
It was quickly followed by Encana’s decision to take a 30 percent stake in the Apache-operated Kitimat LNG project, designed to eventually convert 1.4 billion cubic feet per day into LNG for shipment to Asia, although Encana insisted the two deals were “unrelated.”
LNG exports vital But there is little doubt among observers that LNG exports are vital to the hopes of producers such as Encana, Shell Canada, Apache, EOG Resources, Nexen, Talisman Energy, Penn West Petroleum and Progress Energy Resources to find market outlets for their British Columbia gas.
Encana is in an especially tight spot, sitting on trillions of cubic feet of resources that it needs to develop to keep shareholders satisfied.
Commenting on the failed PetroChina deal, Encana Chief Executive Officer Randy Eresman said a year of “exclusive negotiations” was unable to produce an “alignment on the proposed transaction.”
He said the “disciplined and determined process we undertook on this one initiative in our multi-faceted and ongoing joint-venture strategy has gone a long way to demonstrate the tremendous value that we have created at Cutbank Ridge and validates our plans to accelerate recognition of that value.”
“As such, we have determined that the best way for us to advance our plans to unlock the value from our Cutbank Ridge business assets is to offer up a variety of joint-venture opportunities for positions in this undeveloped resource and, separately, to examine a transaction with respect to our midstream pipeline and processing assets in this area,” Eresman said.
Government decision not required He did not indicate whether a midstream deal is in the works, although Encana said it has hired RBC Capital Markets and Jefferies & Co. to seek an alternative to the PetroChina deal, with the pressure on Encana following its recent disclosure that low gas prices would prevent it from achieving its five-year goal of doubling production.
A number of analysts are offering explanations for what Encana admitted were “significant gaps” between the two companies.
Some suggest PetroChina likely wanted more control over the venture, given China’s desire to obtain technical expertise to develop its own shale gas resources, estimated at 900 trillion cubic feet, and was probably unhappy that Encana had scaled back its own targets to grow production through 2015 to 10 percent a year from 14.4 percent.
Others think the Chinese authorities were not prepared to sanction an investment that averaged C$17,000 per acre when Malaysia’s state-owned Petronas paid only C$14,000 per acre to acquire a stake in Progress Energy Resources’ shale gas assets in British Columbia.
The failed venture means the Canadian government is no longer required to make what would have been a pivotal foreign investment ruling at a time when critics accuse China’s state-owned firms of refusing to pay reasonable prices to secure natural resource assets.
While other Canadian upstream joint-ventures have laid out details of payment schedules, showing what percentage of their transactions were due up front and what percentage would cover drilling and other costs, the Encana-PetroChina agreement provided no such information.
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